Saudi Arabia’s monetary aggregates continued to show solid growth reflecting strong economic performance. Expansionary fiscal policy and low interest rate environment played an important role in maintaining such a trend.

Growth in broad money (M3) accelerated to 16.2 percent year-on-year (1.4 percent month-on-month) in May from 14 percent in April. The narrower M2 measure, which includes demand deposits, time and savings deposits and currency outside banks, also expanded 15.6 percent year-on-year (0.9 percent month-on- month) in May versus 15 percent in April.

The growth in both measures were driven by healthy growth in demand, time and saving deposits, which increased 16.2 percent year-on-year (0.7 percent month-on-month) in May compared with 15.8 percent in April, according to a report by Jadwa Investment.

The monetary base, however, contracted 2.4 percent month-on-month in May but remained 15.5 percent higher than a year earlier. The monthly contraction in monetary base is mainly due to a 5.5 percent drop in the bank deposits with SAMA (Saudi Arabian Monetary Agency). At the same time, currency outside banks recorded a strong monthly growth of 2.4 percent owing to strong domestic demand, putting a floor or the monetary base contraction. Given such monetary dynamic, the money multiplier reversed its downward trend and slightly increased to 4.7 percent.

The Jadwa report said net foreign assets (NFAs) of the Saudi financial system continued to expand, reaching SR 2.68 trillion in May compared with SR 2.63 trillion in the previous month. SAMA added SR 31.8 billion to its NFA in May leading to an NFA expansion of 1.3 percent month-on-month as its gross foreign assets rose by SR 31 billion compared with SR 19.7 billion in the previous month. At the same time, SAMA's foreign liabilities marginally increased from SR 4.7 billion at the end April to SR 5.7 billion in May. The improvement in gross foreign assets reflects in part a rebound in oil production during April and May, which were scaled slightly up to 9.3 million barrel per day (mbpd) compared with 9.1 mbpd year-to-March.

Foreign asset position also contributed to an expansion in SAMA's total assets, which grew 1.7 percent month-on-month in May to SR 2.60 trillion. Within foreign assets, SAMA increased its investment in foreign securities and in foreign currencies convertible to gold by SR 55 billion and SR 5 billion in May, respectively, while reducing deposits with banks abroad by SR 27.3 billion.

However, Jadwa said the positive momentum in SAMA's foreign assets is likely to slow over the coming few months relative to their strong growth last year as oil prices shift to below $105 per barrel (pb) and the Kingdom adjusts its production to an average of 9.6 mbpd this year.

The NFAs of the commercial banks reversed the previous month contraction to expand by 9.6 percent month-on-month in May. This increase was mainly due to a 7 percent increase in gross foreign assets to SR 215 billion despite a 2.6 percent rise in foreign liabilities. At the end of May, bank foreign assets are 2.8 times the foreign liabilities reflecting the strong external position of the local banks. On their domestic position, banks maintained liquid with elevated deposits with the central bank. While contracting by 5.5 percent month-on-month, these deposits recorded SR 157.7 billion in May, of which 51 percent or SR 79.9 billion was excess reserves. This reflects the ample liquidity in the Saudi banking system which could translate into higher credit growth in the coming months. With such liquidity conditions and strong growth in broad money supply, the risk is on the upside for domestic inflation.

Credit to the private sector (excluding securities lending) expanded 16.5 percent year-on-year (1.3 percent month-on-month) in May compared with 16 percent year-on-year (1.6 percent month-on-month) in April.In nominal terms, banks increased their credit portfolio by SR 12.8 billion in May leading to SR 61.8 billion of new net credit issued so far this year compared with SR 52.6 billion for the same period last year. Loans, advances and overdrafts combined to make the largest contribution (16.4 percentage point) to the year-on- year credit growth in May. In addition, total claims on the private sector, which include investment in private securities, expanded 1.2 percent month-on-month in May pushing the year-on-year growth to 16.5 percent compared with 16 percent the previous month.

According to Jadwa, growth in credit to the private sector to expand further this year (16 percent year-on-year), although with a smoother trajectory than we saw last year (16.4 percent year-on-year).

The Jadwa report said growth of bank claims on government remained positive in May owing to higher investment in treasury bills, while bank holding of development bonds continues its downward trend. Commercial bank added SR 3.1 billion to their treasury bills holding in May leading to a total holding of SR 174 billion or 34 percent higher than a year earlier. We expect SAMA to gradually increase treasury bill issuance as government bonds mature and banks remain liquid.

Bank deposits as a main source of bank funding in the Kingdom maintain a solid expansion with a double digit annual growth in the last two years and into this year. In May, deposits increased by 16.7 percent year-on-year (1.3 percent month-on-month) from 14.5 percent year-on-year in April. In nominal terms, bank deposits increased by SR 17.7 billion in May with deposits in foreign currencies accounting for most of the increase owing to a seasonal trend during the summer months. As monthly growth in credit to private sector and non-financial government entities (1.2 percent) in May was roughly matched with monthly expansion in deposits (1.3 percent), the system-wide loan-to-deposit ratio was broadly unchanged at 80 percent in May.

The report said expansion in credit and low funding costs continue to contribute to a pick-up in bank profits. In May, banks recorded a profit of SR v3.2 billion, 11 percent high than their profits in May last year, taking the year-to-May profit to SR 15.7 billion. According to Jadwa this year's bank profit to surpass the all-time high of SR 34.7 billion recorded in 2008.